About eight years ago and read an article that discussed stock options. I didn't know anything about options but it intrigued me. So I did some research and found that options were right for me. An option gives someone the right to buy (or sell) a stock at a certain price. You pay a premium for this right and you can exercise this right any time before the option expires.
For example, say you are thinking about buying Apple stock (AAPL). Apple is currently trading at $447 per share as of right now. Let's say you think the stock will rise in value over the next 20-30 days but you don't want to risk putting up the $44,700 to buy 100 shares today. Instead, you can buy one option contract that will give you the right to buy 100 shares of stock at a certain price. Let's say you think the stock has a good probability of going up to over $460 a share within 20 days. You are only about 60-70% confident this will happen so you wish to buy a call option with a $450 strike price and an expiration date of June 21. This gives the stock 22 days to go up. The price of this option costs $10. This means for every contract (100 shares) it will cost you $10*100 = $1,000 for the right to buy AAPL at $450. If the stock goes up to say $470 before June 13 you can buy 100 shares for $450 per share and your profit would immediately be $470 - 450 = $20 - $10 (cost to buy option) = $10 + 100 shares = $1,000. You just doubled your investment. However, you will need the stock to increase to at least $460 or you take the risk of losing money since the option costs you $10.
However, I personally wouldn't suggest doing this type of investment. You will need the stock to increase in value quickly or you take the risk of losing money. Normally people who buy options will sell the option and choose not to buy the underlying stock. For example, if you buy the $450 AAPL call option for $10 and the stock increases in value by $4 per share the day after you buy the call option the value of this option will increase to say $12. How much the option will increase depends on a few factors such has time until expiration, if the option is in the money or out of the money, etc. The delta is a key indicator of how much you can expect. For example, if the delta on our AAPL call option is .5 it means that for every $1 increase in the stock our option will increase by .5. So if AAPL goes up $4 we can expect our option to increase by $2. If this happens you just made $2 / $10 or a 20% return in one day. If you were holding the stock your increase would be $4 / $447 = 0.9% (less than 1% return in one day). So as you can see, options can give you a much better return on your investment if you believe the stock will rise or fall in a short period of time.
If you think the stock will fall you would buy a put option which gives you the right to sell a stock at a certain price before expiration.
There are a lot of different types of options strategies that I use to make money. Most of these are very low risk and I will get into some of these in some of my later posts. For example, if you are thinking about buy 100 shares of stock I can show you how you can make additional income before you buy the stock by selling puts and I can also show you how to make additional income on the stock after you own it buy selling calls. Anyone not taking advantage of these strategies are losing out on this free money.
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Jonny
If you bought the AAPL 450 call expiring on June 21 yesterday like in my example, you could sell that option for $14.90 today. Since you bought this at $10 you would have made a $4.90 profit or $490. This would be a 49% return in one day! (4.9 / 10 = .49)
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